The Guardian has published some good old fashioned investigative reporting on Tescos today. As it says:
Tesco has created an elaborate corporate structure involving offshore tax havens which enables it to avoid paying what could be up to £1bn of tax on profits from the sale of its UK properties.
The complex new structures uncovered by a six-month Guardian investigation include a string of Cayman Island companies, each named after a different colour, from aqua to violet. These are being used by the supermarket giant as it proceeds with its announced programme to sell and lease back £6bn worth of its UK stores.
The stores are being sold to external investors providing Tesco with a big one-off gain which, ordinarily, would be liable to tax, while allowing it to remain in the stores and pay rent to the new owners.
Ian Griffiths and Felicity Lawrence who wrote this are two first rate journalists. I know how long they worked on this story. But what really gets me about this are the broader issues. In its CSR statements Tescos says:
One of our most important values is to treat people how we would like to be treated. We try to achieve this by being a good employer and by playing our part in local communities. People tell us that they want use to use our size and success to be a force for good.
Paying tax in the place where you make your profit is the best way any business can support its local community. Tescos is not doing that. It is seeking to avoid its corporate responsibility to the UK in this respect. That is the only justification for its use of a Cayman structure.
Tescos cannot argue, as it does in the Guardian, that it has:
a duty to organise its affairs in a tax-efficient manner.
That is not true. Section 172 of the Companies Act 2006 says:
A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the
company for the benefit t of its members as a whole, and in doing so have regard (amongst other matters) to(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
Nothing in there says a company has a duty to be 'tax efficient' (which is simply a euphemism for tax avoiding). Indeed, since it is abundantly clear that this decision is:
a) Not taken in good faith, or Tescos would not have worked so hard and for so long to stop the Guardian publishing it story (as I believe they did);
b) not in the best interests of their employees, who would clearly benefit from the tax being paid in the UK;
c) Is not beneficial to having a good business reputation and is inconsistent with a high standard of conduct, especially in light of current opinion on the use of tax havens;
d) increases long term risk for shareholders who no longer have control of the prime assets the company uses, which are instead now controlled through opaque structures;
and as such it is easy to argue that the deal fails the tests in the Companies Act, let alone any CSR measure.
So let's be clear what is really going on here: Tescos is using abusive structures to increase profits at the expense of the UK taxpayer who form the vast majority of their customers to enhance the well being of the senior management first of all and the wealthiest in society who own their shares second (pensioners included by the way: almost all with private pensions are by definition in that wealthiest grouping) at cost to the rest of society at large.
Nothing Tesco can do can redeem that and make them seem like a responsible company: they're not. This is corporate fiddling. It cannot be described any other way.
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One thing I found amusing was the point that the headline corporation tax rate is 30% while Tesco’s paid a 20% effective tax rate.
This was presented as if it was clear evidence of some skullduggery going on.
By the same method of calculation the Guardian Media Group’s effective tax rate in 2007 was 16%.
So wo is doing the skullduggery?
For some years I raised the question with land tax campaigners of why commercial organisations engaged in leaseback deals (having in my early days worked for a company who did just this). I always suspected that it was a tax scam. However there is evidence that another reason is that it forces companies to comprehend the true rental cost of property assets and provides a good discipline.
The point I’m really trying to make is that a high rate land value tax would not only significantly reduce the capital value of land, thus effortlessly transferring the unearned gains in land values to the Treasury, but would force companies to become more efficient.
There’s nothing in Section 172 about making money or value creation or such like, either – are you going to cite this as evidence that profitability is not part of a director’s remit?
Luis
I think that implicit in the preamble – and I am very pro-business. I would neve argue against the right to make profit.
Richard
[…] Richard Murphy points out the inconsistencies between Tesco’s carefully worded PR statements, its CSR policy and the Companies Act 2006: Tescos is using abusive structures to increase profits at the expense of the UK taxpayer who form the vast majority of their customers to enhance the well being of the senior management first of all and the wealthiest in society who own their shares second (pensioners included by the way: almost all with private pensions are by definition in that wealthiest grouping) at cost to the rest of society at large. […]
oh I see – but it’s pre-tax profitability that directors are supposed to worry about, not post-tax, according to you? Otherwise the duty to tax efficient is also implicit in the preamble.
If tax efficiency is not implicit in the preamble, then, according to you, a company director should be indifferent between two alternative business structures, where one incurs twice the tax liability of the other? pull the other one.
The cash flow available for investment / dividends / wages is post-tax, so I think that tax efficiency is implicit in the preamble.
❓
Richard
I haven’t seen any ‘feedbitz’ e-mails for the best part of this month. Have things changed or is there a problem?
David Drinkwater
[…] admit I guessed as much when writing my blog on this issue on Wednesday. I knew that this story was in the offing last October. I suspected that the delay […]
Luis
I have never said a company may not plan tax.
I have ssaid a company should not use artificial strcutures to avoid tax.
To do the latter denies the fact that tax paid is a dsitribution to society out of profit for the licence given to an enterprise to operate. It is not a cost.
See the TJN Tax Code of Conduct at http://www.taxjustice.net/cms/upload/pdf/AABA-TR-Code_long.pdf
Richard
Whoa – you said that it is “not true” that a company has a duty to “organize its affairs in a tax efficient manner” – now you are saying that certain varieties of tax planning are acceptable and others are not – you suggest a difference between tax ‘planning’ and tax ‘avoidance’, and some categories of ‘artificial structure’ that differ from regular corporate structures. This distinctions may or may not be valid, but they do not support what you wrote in your post denying the duty of tax efficiency. What is tax planning (which you say is OK) for? Are they planning for tax inefficiency?
Luis
Tax efficiency is a euphemism for avoidance. As it says, that is avoiding the law. No company has a an obligation to do that
Tax planning is a euphemism for tax compliance – we all have a duty to do that and on occassion it requires choices which do not break the underlying principle that the economics of the transcation and its tax treament are not aligned.
My language is clear and consistent – you’re just choosing not to engage with it
Richard
Richard,
This is me engaging with your language. You may thing your language is clear – it is not clear to me. I do not think it is generally accepted usage to equate tax planning with tax compliance – I think most people would take tax planning to mean compliant tax minimization – thinking about how to organize your business in order to minimize tax. It is not obvious that efficiency – legally ‘avoiding’ tax, minimizing tax payments, means ‘avoiding’ the law, as opposed to complying with the law.
A company of a given structure will qualify for certain tax breaks (R&D credits etc.) – this alone explains why effective tax rates differ from the headline corporate tax rate. Companies are also able to change their structure to decrease their tax bills. You may argue that certain structures are legitimate and others not. I would interpret tax ‘efficiency’ as tax minimization, I do not think the distinction between tax planning and tax efficiency holds water.
OK, thanks for engaging with me.
R & D tax credits accoridng to my analysis of published accounts reduces effective rates of tax by maybe 0.1%. It’s tiny. It’s also a red herring.
Sorry if you don’t like the language I use – but avoiding meaning avoiding and complying meaning complying and planning meaning planning to comply seem quite strightforward to me
It’s the accountancy profession that has subverted the language for its benefit
And I’m a chartered accountant saying that
“Tax efficiency is a euphemism for avoidance. As it says, that is avoiding the law. No company has an obligation to do that”
You call yourself an accountant and yet you still deliberately obfuscate and blur the distinction between “avoidance” (legal and proper) and “evasion” (not).
By implying that tax avoidance is the same as evasion, you are merely a propagandist and certainly not an authority.
G Harrison
Absolute rubbish, if I might say so.
What I am doing is acting ethically as an accountant and making clear that avoiding the law might be legal but wholly unacceptable. On many occassions it is also impossible to tell which is being done, evasion or avoidance and the risk to the perpetrator is therefore high, again something that ethically I can point out.
What my profession do by perpetrating the claim you have is to create a myth that there is a dividing line between the two which they can identify, when they cannot, and that waht is legal is ethical. That definitely does not follow.
So I am living up to the professional standards required of an accountant. The sorry fact is that too many do not.
Richard
I might have known you’d come back with a rubbish answer. All bluster and self-righteous posturing.
The law has decided that what is legal is legal. Ethics don’t come into it.
Avoidance is legal. There is a famous legal judgement which says so.
You are not living up to professional standards as you put it but attempting to make it a requirement to “put a shovel in to a man’s stores” more times than the law requires.
G Harrison
The bluster is all yours, I am afraid, as is the moral lowground.
Can you tell me what is wrong with an accountant being ethical? Didn’t you know that it is such conduct that defines a profession?
Richard
Still no proper answer.
I bet your Mother told you, “Our Richard is the only one in step”.
And still we don’t know why Tesco, or anybody else, should pay more tax than the law requires. Except that you say they should. And their accounts should advise them so.
That’s not being ethical, merely stupid.
G Harrison
Please refer to http://www.taxjustice.net/cms/upload/pdf/AABA-TR-Code_long.pdf and come back when you have an answer.
Richard
You’re joking aren’t you?
You expect me to read a link that is merely a self-referential one.
Answer the question. No need to refer to any other of your ‘papers’.
Why should anyone pay more tax than the law – as it stands – requires? How is it ‘ethical’ to advise anyone to do so?
It really is amazing that the rightwingers can only ever resort to insult – just like they did on the Hecklers broadcast – and they never can abide the concept of ethical behaviour – I guess that’s what defines ‘rightwing’ nowadays. But, pre-Thatcher didn’t even rightwingers know what constituted business ethics?
G Harrison
If you really can’t be bothered to read, let alone think, I’m really not sure what you expect of me.
I have offered you access to an answer to all your questions. I’m not here to spoonfeed you.
But try thinking about ‘responsibility’ and ‘ethics’ and ‘society’ and ‘risk’ and ‘reputation’ and ‘stakeholder’ and you’ll beging to get the idea.
Although I have an odd feeling I might be optimistic in thinking that those might have much meaning for you at all.
So far ‘self interest’ is the only thing you have shown much understanding of.
Richard
So, eventually you just give up and delete commentary you find difficult to answer.
I suppose we can hardly expect you to believe in the free exchange of views when you so clearly believe in confiscatory taxation.
I actually deleted your comment in error
But the truth is I have not given up – I’ve given you access to all the argumenst you need and you have refused to engage
I have no energy to bother with you on that basis
Regards
Richard
Hi Richard,
Interesting stuff, this: As far as I can tell, from a quick skim-read, you’re advocating that companies, such as Tesco, should pay the maximum amount of tax possible on their earnings, is that correct?
Ade
Not at all, and far from it.
Wjat I am saying i a company should seek to comply with the tax law of each country in which it operates. Tax compliance is paying the right amount of tax, but no more, at the right time and in the right place where ‘right’ means that the econmic reality of the transaction matches the time and place in which it is delcared for tax.
I am saying Tescos does not appear to subscribe to this view.
Richard
OK. Without reading the original Grauniad article (sorry, I refuse to read that rag), I’m guessing that Tescos actually own the Cayman Is. corporations that are buying the properties?
If so – and if Tescos sell at more-or-less market value, thus making upto £6bn, on which they are taxed; how is this any worse than if they didn’t sell at all?
Of course, if they’re selling for £1, then being charged £100m/year by the Cayman Is. companies, then that’s potentially a different kettle of fish – but I expect it would also be considered fraud and/or tax evasion, and prosecuted as such.
[…] Tescos please note. […]
Ade
If you can’t be bothered to read the Guardian should I take your question seriously?
Richard